Rosenberg v Fifteenth Eestin Nominees Pty Ltd
[2007] VSC 101
•27 April 2007
S
| IN THE SUPREME COURT OF VICTORIA | Not Restricted |
AT MELBOURNE
COMMERCIAL AND EQUITY DIVISION
No. 7433 of 2004
| EMANUEL ROSENBERG AND GLEN OAK NOMINEES PTY LTD (ACN 110 045 737) | Plaintiffs |
| v | |
| FIFTEENTH EESTIN NOMINEES PTY LTD, (ACN 005 291 832), SABRINA PHILLIPA BERGER AND IAN BARRY BERGER | Defendants |
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JUDGE: | HABERSBERGER J | |
WHERE HELD: | MELBOURNE | |
DATES OF HEARING: | 1-3, 6-9, 14-17, 20, 21, 23, 27, 28, 30 MARCH 2006 | |
DATE OF JUDGMENT: | 27 APRIL 2007 | |
CASE MAY BE CITED AS: | ROSENBERG v FIFTEENTH EESTIN NOMINEES PTY LTD | |
MEDIUM NEUTRAL CITATION: | [2007] VSC 101 | |
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Equitable or Promissory Estoppel – Whether father was estopped from removing trustee of discretionary trust and changing will because of representations and promises allegedly made to daughter and son-in-law – Reliance – Detriment – Unconscionability – Whether constructive trust of his assets established.
Trusts – Removal of trustee of discretionary trust for alleged breaches of trust – Whether breaches warranted removal.
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APPEARANCES: | Counsel | Solicitors |
| For the Plaintiffs | Mr PB Murdoch QC with | B2B Lawyers |
| For the Defendants | Mr GR Ritter QC with Mr R Greenberger | Kalus Kenny |
HIS HONOUR:
Introduction
This proceeding arose out of an unfortunate dispute between members of the same family over the ownership and control of certain valuable assets.
On 15 July 2004 the first plaintiff, Emanuel Rosenberg ("Mr Rosenberg"), by a Deed of Removal and Appointment purported to remove the first defendant, Fifteenth Eestin Nominees Pty Ltd ("Fifteenth Eestin"), as trustee of The E Rosenberg Investment Trust ("the Investment Trust") and to appoint in its place the second plaintiff, Glen Oak Nominees Pty Ltd ("Glen Oak"). At that time Fifteenth Eestin had three directors – Mr Rosenberg, his daughter, Sabrina Phillipa Berger, and her husband, Ian Barry Berger. By virtue of their numbers, Mr and Mrs Berger controlled Fifteenth Eestin, which refused to acknowledge its removal and to deliver up the trust documents, property and income as directed by Glen Oak.
Accordingly, on 6 August 2004, the plaintiffs commenced this proceeding by originating motion. It was subsequently ordered that Mr and Mrs Berger be added as defendants and that the proceeding continue as if commenced by writ, with pleadings to be served. Nevertheless, because affidavits had been filed in respect of the originating motion and an interlocutory application for the appointment of a receiver, it was ordered that evidence in chief be given by way of affidavit. Yet further affidavits were filed prior to the hearing. The result was that the evidence in chief of each of the principal witnesses consisted of a number of affidavits filed over a considerable period of time.
The plaintiffs' primary claim was that, as the sole remaining appointor of the Investment Trust, Mr Rosenberg was entitled under its provisions to remove Fifteenth Eestin as trustee and to appoint Glen Oak in its stead. In the alternative, the plaintiffs relied in their statement of claim on a number of alleged breaches of trust as grounds for the removal of Fifteenth Eestin as the trustee of the Investment Trust. The pleaded breaches of trust referred to loans, borrowings and income and capital distributions made or entered into by Fifteenth Eestin. In their final submissions, however, the breaches of trust relied on by the plaintiffs were limited to:
(a)the income distributions to a company, Project Hardware Pty Ltd ("Project Hardware"), which, it was alleged, was not a beneficiary of the Investment Trust;
(b)the income distributions to a company, S & I Investments (Australia) Pty Ltd ("S & I Investments") which, it was alleged, was not a beneficiary of the Investment Trust;
(c)an income distribution to Mr Berger who, it was agreed, was not a beneficiary of the Investment Trust;
(d)a capital distribution allegedly to Mr and Mrs Berger jointly, when Mr Berger was not a beneficiary of the Investment Trust; and
(e)the trustee's alleged failure to give real and genuine consideration to the exercise of its discretion, by leaving the decision-making, particularly in relation to the making of distributions, to its accountant Mr Norman Same, including the habitual use of trust funds to advance the personal interests of Mr and Mrs Berger, or for the purposes of "the Berger Group", without considering whether to do so was in the interests of the Investment Trust or the beneficiaries as a whole.
In their amended defence and counterclaim filed on 20 March 2006 the defendants pleaded that Mr Rosenberg was estopped from removing Fifteenth Eestin as trustee of the Investment Trust because by virtue of certain representations and promises he allegedly made to Mrs Berger and to Mr Berger, and certain other conduct, he created as from about November 1990 an assumption or expectation on the part of each of them, which they acted on to their detriment, and therefore that it would be unconscionable in the circumstances to allow him to exercise those rights. The assumption or expectation was said to be that:
(a)Mr Rosenberg would, during his life, give his entire wealth to Mrs Berger;
(b)the benefit of the Investment Trust, and all other assets under the management and control of Fifteenth Eestin would be for the benefit of Mr Rosenberg and his wife Bloom ("Mrs Rosenberg") and Mrs Berger during the lives of Mr and Mrs Rosenberg and, after their deaths, for the benefit of Mrs Berger;
(c)the management and control of the Investment Trust would remain with Mr and Mrs Berger;
(d)Mr Rosenberg would not revoke his will executed on 3 May 1988 ("the 1988 will"); and
(e)Fifteenth Eestin would not be removed as trustee of the Investment Trust, and that no other trustee would be appointed to the Investment Trust either in lieu of, or in addition to, Fifteenth Eestin.
The defendants further pleaded that Mr Rosenberg was estopped from revoking the 1988 will and any codicils thereto and executing any new will at variance therewith.
In the alternative, the defendants pleaded that:
(a)between about November 1990 and 1994, Mr Rosenberg held the whole of his assets and wealth on a constructive trust for the benefit of Mr and Mrs Rosenberg and Mrs Berger during the lifetimes of the parents and thereafter to be distributed solely for the benefit of Mrs Berger; and
(b)since about 1994, Mr Rosenberg has held the whole of his assets and wealth on a constructive trust for the benefit of himself and Mrs Berger during his lifetime, and thereafter to be distributed solely for the benefit of Mrs Berger, on condition that during Mr Rosenberg's lifetime, Mr and Mrs Berger provide him with a place to live.
The defendants denied that any of the loans, borrowings or distributions were made or entered into in breach of trust save that they admitted that the income distribution to Mr Berger of $3,000 was made by mistake and would be reversed. They also pleaded that the capital distribution was made solely to Mrs Berger and not to Mr and Mrs Berger jointly.
The defendants also pleaded that the appointment of Glen Oak as trustee was, in any event, ineffective by reason of Mr Rosenberg's alleged financial or controlling interest in it, contrary to clause 10A(b) of the Deed of Settlement.
The final issue raised was whether any vesting of trust property in Glen Oak would be subject to Fifteenth Eestin's equitable charge or lien over the property of the Investment Trust to secure its right to be indemnified in respect of the liabilities of the Investment Trust. It was agreed that submissions on this issue would await the decision on the other issues.
The History of the Dispute
Before examining in detail the competing claims it is appropriate to set out a summary of the history of this dispute. In order to simplify matters, I refer on occasions to the individual members of the Rosenberg and Berger families by their first names. No disrespect is intended.
Mr Rosenberg was born on 3 August 1917. He left school at thirteen. He worked hard at a series of jobs and eventually built up a successful furniture making business. Mr and Mrs Rosenberg had two children, a son Barry David Rosenberg born in 1946, and a daughter Sabrina born in 1955. In about 1966, Mr Rosenberg bought a timber business, Provans Timber, and in 1983, a brass appliance importing business, The Delf Brass Co ("Delf Brass"). The Delf Brass business was owned by Rosekay Holdings Pty Ltd ("Rosekay"). On 1 April 1996 that company changed its name to Project Hardware. Initially Mr Rosenberg and his son Barry were the directors of Rosekay.
By a Deed of Settlement dated 25 November 1972 The Emanuel Rosenberg Family Trust ("the Family Trust") was established. The beneficiaries included Mr and Mrs Rosenberg, Barry Rosenberg and his wife Sara and any of their as yet unborn children, and Sabrina Rosenberg. The trustee of the Family Trust was Rangeway Nominees Pty Ltd ("Rangeway"). Initially Mr and Mrs Rosenberg were the directors of Rangeway.
By a Deed of Settlement dated 14 April 1977 the Investment Trust was established. Initially it was known as The B D Rosenberg Investment Trust, but on 28 June 1991 it changed its name to The E Rosenberg Investment Trust. Fifteenth Eestin was the trustee and Mr Barry Rosenberg and his father were its directors. They were also the joint appointors of the Investment Trust. The specified beneficiaries were Barry and Sara Rosenberg and their children. The definition of "beneficiaries" included as well as the specified beneficiaries, "any spouse, parent, brother, sister ... of the specified beneficiaries and the children of such brother, sister …" and "the trustee … of any trust or settlement ('the nominated trust') which the trustee may at any time … in writing nominate as a beneficiary … provided always that:- (a) immediately prior to such nomination a beneficiary under this trust and settlement is a beneficiary of the nominated trust …"
Sabrina Rosenberg was educated at the Methodist Ladies College in Kew. After leaving school she attended Holmes Business College. She worked in an advertising agency for about two years and then at a friend's jewellery establishment for the next nine years. In 1984 she commenced working in the Delf Brass office. On 13 February 1984, Ms Rosenberg was appointed a director of Rangeway and two days later she was appointed a director of Rosekay. At this time she received further shares in Rosekay.
In about February 1987 Mr Rosenberg purchased the Blue Boy Art Gallery for his daughter to run. He also provided the funds to purchase 276 Toorak Road, South Yarra, the premises at which the gallery operated. Mr Rosenberg and Sabrina were appointed the directors of Mistirose Pty Ltd ("Mistirose"), the trustee of the Blue Boy Art Gallery Unit Trust. They also held the two shares in Mistirose. According to the defendants, by 2005 Mistirose was 88.9% owned by SFSG Pty Ltd ("SFSG") as trustee of the Berger Family Superannuation Fund, of which Mr and Mrs Berger were members, and 11.1% owned by Project Hardware.
Mr Rosenberg executed a will on 3 May 1988. By that will he left his residuary estate to his wife, and then to his daughter if his wife predeceased him, and then to any children of Sabrina if she predeceased him. Mr Rosenberg stated in the will that he made no provision in it for his son Barry because he had made proper and adequate provision for him during his lifetime. The will also provided that if his wife predeceased him, then the power of appointment vested in him to change and alter the trustee of the Family Trust and the trustee of the Investment Trust (still known as the B D Rosenberg Investment Trust) would vest in Sabrina as from the date of his death; and that if Barry predeceased him, then the power of appointment vested in him to change and alter the trustee of the Investment Trust and the trustee of the B D Rosenberg Trading Trust would vest in Sabrina as from the date of his death. Mr and Mrs Rosenberg made similar wills.
According to the minutes of a meeting of the directors of Fifteenth Eestin said to have been held on 30 June 1989 and attended by Mr Rosenberg and Mr Barry Rosenberg, it was resolved to make the following distribution of the net income of the Investment Trust: $12,000 to the Family Trust and "the balance" to Rosekay. The minutes were signed by Mr Barry Rosenberg as chairman. Rosekay was not then a beneficiary of the Investment Trust.
Mr and Mrs Berger married in October 1989. A year or two previously, Mr Rosenberg had bought a house at 14 Como Avenue, South Yarra for his daughter. The purchase price was about $700,000. Before she became the unencumbered owner of this property, Mrs Berger did not own any real estate and her assets were modest. In the following two years the house was extensively renovated at a total cost of approximately $500,000, which was all paid by Mr Rosenberg.
In mid 1990 Mr Berger, an accountant by training, was looking for a business to invest in. In 1988 he and his former father-in-law had sold their Atlantic Bakeries business to Goodman Fielder. Mr Berger had investigated other businesses, including a car seat cover business and a hardware business owned by Kaylock (Australia) Pty Ltd ("Kaylock"), but had decided against investing in them at that time. Mr Berger owned a property in Dixon Street, Malvern, worth about $220,000 or $230,000. He also had cash of between $150,000 and $200,000. He agreed that he could not have afforded to buy the Delf Brass business at that time.
In mid 1990, the principal assets of the Investment Trust were three properties at 457 Hoddle Street, 477 Hoddle Street and 168-174 Alexandra Parade, Clifton Hill. They were known as "the corner properties". In 1990 the run down building on the property at 168-174 Alexandra Parade, Clifton Hill was rented out for about $52,000 per annum; the property at 457 Hoddle Street, Clifton Hill was tenanted by a company not paying any rent; and the property at 477 Hoddle Street, Clifton Hill was tenanted by a company paying rent of about $40,000 per annum. At 30 June 1990 the balance sheet of the Investment Trust showed net assets of $94,334. Its liabilities totalled $2,232,801.
In June or July 1990 Mr Rosenberg underwent heart bypass surgery. The Blue Boy Art Gallery was closed in 1990, after Mr Rosenberg's bypass operation. At this time Mrs Berger was pregnant with her first child, Antony, who was born on 19 September 1990.
Mrs Berger said in her first affidavit, sworn on 12 September 2004, that, shortly after her father left hospital after his heart bypass surgery in about mid July 1990, he told her that:
(a)he was unhappy with the way Barry was running the Delf Brass business;
(b)he was concerned that when he died, that Barry and she should not be in dispute over the division of the family controlled assets and that he would rather see them enjoying themselves whilst he was still alive and ensure that they did not fight after his death; and
(c) he had decided to split his wealth up between Barry and her.
Mrs Berger said nothing in her first affidavit about any representations or promises made by Mr Rosenberg to her at the hospital.
In her third affidavit, sworn on 21 December 2005, Mrs Berger said that at the hospital her father told her that he "wanted to split everything equally between Barry and me, so that there would be no problems if he died." She said that by what he said, and the way he spoke, she understood him to refer to properties, including the properties of the Investment Trust, and to the two businesses, Provans Timber and Delf Brass. Mrs Berger further said that Mr Rosenberg told her that she would become a director of Fifteenth Eestin "in order to participate in the management and control" of the Investment Trust and that the assets of the Investment Trust and his other assets would be used for him, her mother and her whilst her parents were alive, and then they would be for her benefit alone. She said that she told her husband about these discussions with her father.
In cross-examination, Mrs Berger said her father told her that what he wished to do was to bring about events that would mean that she would never have to be dependent upon an exercise of judgment or discretion by Barry for her welfare. This concern may have resulted from Mr Berger telling Mr Rosenberg about something allegedly said by Mr Barry Rosenberg about her financial position following their father's death. Mrs Berger also agreed that Mr Rosenberg told her that he was making her a director of Fifteenth Eestin because he wanted her to participate in the management of the affairs of the Investment Trust. Mrs Berger said that she understood that her participation was for the purposes of making decisions that would be of benefit to the beneficiaries, including her father and mother and herself.
Mr Rosenberg said in his second affidavit, sworn on 22 September 2004, that his intention was for the Investment Trust "to be run collaboratively by myself and my daughter, for my benefit, and for my daughter to then derive a benefit from the trust assets after my death." In his third affidavit sworn on 27 February 2006 Mr Rosenberg did not deny that conversations took place at the hospital, but he denied that he said to Mrs Berger that he wanted to split everything equally between Barry and her. He said that, at some unspecified time, he told Mrs Berger that the assets of the Investment Trust would be used for the benefit of himself, his wife and his daughter while they were alive and that he would ensure that Mrs Berger would benefit from the Investment Trust assets after her parents died.
In cross-examination, Mr Rosenberg denied having any discussion at the hospital with Mrs Berger about splitting the family assets. His evidence was very confused about whether he had ever told his daughter that his intention was that she should derive a benefit from the assets of the Investment Trust after his death – first denying that he said it, then saying that he could not recall and later agreeing that he said it. Mr Rosenberg also agreed that he told Mrs Berger that he did not want to see his son and daughter in dispute when he died, that he would rather see them enjoying themselves whilst he was still alive and that he had decided to split his wealth up between them, "in equal halves".
The representations and promises allegedly made by Mr Rosenberg to Mrs Berger in mid July 1990 were pleaded in paragraph 12 of the defence and counterclaim. They were referred to as "the first promises" and were said to be that:
(a)to avoid any dispute between Barry and Sabrina over the division of family controlled assets after his death, Mr Rosenberg would, during his life, split up his wealth between Barry and Sabrina; and
(b) he would take steps to ensure that the assts of the Investment Trust
(i) would be, and remain, managed and controlled by Sabrina;
(ii)would be used for the benefit of himself and his wife Bloom and Sabrina while the parents were alive;
(iii) would be for the sole benefit of Sabrina after the parents' deaths.
It was common ground that in 1990 Mr Rosenberg and his son had some disagreements about the running of the Provans Timber business and the Delf Brass business, in particular the role played by Barry's brother-in-law, Ady Broder, in managing the latter business. There were also personal difficulties between the family members. Mr Rosenberg therefore proposed a split of the Rosenberg family assets, which subsequently took the form of a Dissolution Agreement.
In her first affidavit Mrs Berger said that in about October 1990 her father told her that his intention was, and the purpose of the Dissolution Agreement would be, that:
(a)she would be looked after into the future and after his death so that she would not be reliant on her brother;
(b)he would be giving her his power of attorney for her use if required;
(c)the assets of the Investment Trust would be utilised for the benefit of himself and her mother and her, whilst her parents were alive, and after their deaths, for her; and
(d)he would give Gard Nominees Pty Ltd ("Gard Nominees") and the Provans Timber companies to her brother, Barry.
Gard Nominees was the trustee of the B D Rosenberg Family Trust, which owned the properties at 18 Merriwee Crescent, Toorak (the home of Barry and Sara Rosenberg) and 226 Alexandra Parade, Clifton Hill. Provans Timber also owned two properties in Alexandra Parade.
Mrs Berger also said in her first affidavit that at a subsequent meeting between Mr Rosenberg, Barry and her, Mr Rosenberg said that he had decided on a split of all of the assets save for the business of Delf Brass. Mrs Berger said that Mr Barry Rosenberg declined his father's offer to buy Delf Brass. He said that he wanted to get out of that business.
In her third affidavit Mrs Berger said that she now recalled that her husband was also present at that meeting. Mrs Berger further said that, in another discussion between Mr Rosenberg and she and her husband about the proposed family split, her father told her that she was getting the corner properties, being those owned by the Investment Trust. She said that her father emphasised that what he was doing was for her benefit into the future, so she would never be reliant upon Barry to do the right thing by her once he was no longer around to take care of her. Mrs Berger said that Mr Rosenberg told her that his will stated that Barry had been taken care of during his lifetime, and that his estate would go to her mother, and then to her.
In cross-examination, Mr Rosenberg agreed that, as he regarded the corner properties as his, he assumed that they would therefore pass by his will and that he told Mrs Berger that she would get everything under his will, including the corner properties. Later, Mr Rosenberg denied promising her the corner properties and said that there had been no mention of them. He subsequently said that he could not recall promising anybody "that land".
The representations and promises allegedly made by Mr Rosenberg to Mrs Berger in October 1990 were pleaded in paragraph 14 of the defence and counterclaim. They were referred to as "the second promises" and were said to be that:
(a)Mr Rosenberg would, during his life, split up his wealth between Barry and Sabrina;
(b)he was arranging for a Dissolution Agreement to be drawn so as to divide the assets of the family between Barry, his wife, and their associated corporate entities, of the one part, and Mr Rosenberg, Mrs Rosenberg and Sabrina, and their corporate entities, of the other part;
(c)the purpose and effect of the Dissolution Agreement was to ensure that Sabrina would be looked after financially in the future after her parents' deaths, so that she would not be reliant on Barry;
(d)Barry and his family were getting properties under the Dissolution Agreement, and Sabrina would get the properties held by the Investment Trust;
(e)he would ensure that Sabrina would be looked after financially, in the future after her parents' deaths;
(f) he would ensure that the assets of the Investment Trust
(i)would be, and remain, managed and controlled by Sabrina and Ian Berger;
(ii)would be used for the benefit of the parents and Sabrina while the parents were alive;
(iii) would be for the sole benefit of Sabrina after the parents' deaths;
(g)by implication, he would do everything necessary to ensure that Sabrina had the benefit of the represented state of affairs and his promises as set out above; and
(h)by implication, he would not do anything inimical to the represented state of affairs and his promises as set out above, nor would he do anything to prevent or frustrate the fulfilment of the said represented state of affairs and his promises.
Mr Berger said in his fourth affidavit, sworn on 21 December 2005, that his wife told him about the mid July 1990 discussions and about the October 1990 discussions which she had had with her father shortly after each of them had occurred.
On 16 October 1990 Mr Rosenberg executed an Enduring Power of Attorney in favour of Mrs Berger. He agreed in cross-examination that he did this because he was concerned about his state of health and thought that he might not be able to carry through to completion his proposal to split the Rosenberg family assets.
In her first affidavit, Mrs Berger said that shortly after her brother indicated that he wanted to get out of the Delf Brass business, her father asked her husband if he would be willing to run it. Initially, Mr Berger said that he was not interested in running Delf Brass, but he later changed his mind after pressure from Mr Rosenberg. In her third affidavit, Mrs Berger repeated that her husband was reluctant to be involved in the business, but did so to protect and develop the assets which were to be hers under the Dissolution Agreement or by virtue of the assurances her father gave her.
Mr Berger said in his first affidavit, sworn on 12 September 2004, that in October 1990 Mr Rosenberg asked him to come into the Delf Brass business. Mr Berger said that at first he said no, but Mr Rosenberg pressed him. He eventually agreed, mainly, he said, because of his wife. In his fourth affidavit Mr Berger said that in agreeing to take over control and management of the Delf Brass business and to lend it "a substantial sum of money" he was influenced by the fact that Mr Rosenberg had told him and his wife that the Delf Brass business and the Investment Trust would be his wife's in the long term. Mr Berger said that he commenced at Delf Brass on about 12 November 1990. At that time Rosekay owed the bank about $2 million. Over the next three months Mr Berger paid $335,000 from his own money and from borrowings to reduce this debt. No interest was paid by Rosekay on this advance. By about 1995 the debt had been repaid in full from profits generated by the business.
Mr Rosenberg did not dispute that he had asked Mr Berger to run the Delf Brass business. However, in cross-examination he expressed some scepticism about Mr Berger's expressed reluctance to become involved.
Mr Berger also said in his first affidavit that in October 1990 Mr Rosenberg told him that as a result of the division of family assets he had split his assets between his daughter and his son. Mr Berger said that Mr Rosenberg told him that the assets of the Investment Trust would be for the benefit of himself and his wife during their lives, and then for Mrs Berger. (Subsequently Mr Berger said in cross-examination that this should have read that the assets of the Investment Trust would be for the benefit of himself and his wife and Mrs Berger during their lives, and then for Mrs Berger. He suggested that this was a drafting error by his legal team.) In his first affidavit Mr Berger said that Mr Rosenberg then asked him to run the Investment Trust's affairs. Mr Berger also referred to Mr Rosenberg's "long standing assurances that control and management of the Trust would remain" with the Bergers. In his second affidavit, sworn on 19 January 2005, Mr Berger said his becoming a director of Fifteenth Eestin was "sought and encouraged" by Mr Rosenberg, who said he was seeking to "hand over the reins" so as to relieve himself of the burdens of managing the assets under his control.
In his fourth affidavit Mr Berger said that Mr Rosenberg requested him to take over the management and control of both the Delf Brass business and the Investment Trust at about the same time. Mr Berger further said that during discussions about the proposed split of family assets Mr Rosenberg emphasised to him and his wife that what he was doing was for the benefit of Sabrina into the future, so she would never be reliant upon Barry to do the right thing by her, once Mr Rosenberg was no longer around to take care of her. Mr Berger said that Mr Rosenberg told them that his will stated that Barry had been taken care of during his lifetime, and that his estate would be left to his wife, then to Sabrina.
In his second affidavit Mr Rosenberg said that he did not agree that he "ever gave assurances that control and management of the trust would reside" with Mr and Mrs Berger. He said that he agreed to allow Mrs Berger:
"to manage the trust, along with me, for the benefit of myself and my late wife. I told Sabrina that I would ensure that she would benefit from the trust assets after my death."
Mr Rosenberg said that it was true that he did not oppose Mr Berger becoming a director of Fifteenth Eestin, but that he did not "instigate it or encourage it." He said that he had always reserved to himself "the power to ultimately decide who should manage the trust and how it should be managed, and who should benefit from it."
In cross-examination, when asked how he had reserved that power to himself, Mr Rosenberg said:
"Because I’ve never asked anybody else for an opinion when I go to do something … I act as my own judge. I don’t ask anybody."
Mr Rosenberg also denied in cross-examination that he "ever asked Mr Berger to run the trust affairs."
The requests allegedly made by Mr Rosenberg of Mr Berger in about October 1990 to take over the management and control of the Delf Brass business and the Investment Trust were referred to in the defence and counterclaim as "the Request". The representations and promises allegedly made by Mr Rosenberg to Mr Berger in October 1990 were pleaded in paragraph 21 of the defence and counterclaim. They were referred to as "the third promises" and were said to be that:
(a) Mr Rosenberg was going to split his assets between Barry and Sabrina;
(b)the assets of the Investment Trust, and all other assets under his management and control, would be for the benefit of the parents and Sabrina during the lifetimes of the parents, and thereafter for the benefit of Sabrina;
(c)he would ensure that the assets of the Investment Trust, and all other assets under his management and control,
(i)would be, and remain, managed and controlled by Ian and Sabrina;
(ii)would be used for the benefit of the parents and Sabrina while the parents were alive;
(iii) would be for the sole benefit of Sabrina after the parents' deaths;
(d)under the 1988 will all proceeds of his estate went to Mrs Rosenberg, then to his daughter;
(e)the asset arrangements in sub-paragraphs (a), (b), (c) and (d) were for the benefit of Sabrina and Ian.
On 21 November 1990 Mr and Mrs Rosenberg, Mr and Mrs Barry Rosenberg, Mrs Berger and various corporate entities entered into a Dissolution Agreement, which gave effect to the agreed dissolution and split of the Rosenberg family assets between what was called "Barry's interests", representing Barry and Sara Rosenberg, and "Emanuel's interests", representing Emanuel and Bloom Rosenberg and Sabrina Berger.
Pursuant to a Deed of Variation and a Deed of Nomination both dated 21 November 1990 Mr Barry Rosenberg resigned as an appointor of the Investment Trust and was replaced by his mother. He also resigned as a director of Fifteenth Eestin and Rosekay. Mrs Berger was appointed a director of Fifteenth Eestin in his place. As soon as Barry was not involved in the Delf Brass business, his father sacked his brother-in-law.
According to Mrs Berger, the split was not amicable. She said that her father and her brother did not speak to each other until after her mother passed away in 1993. She also said that she had rarely spoken to her brother since 1990. Mr Rosenberg agreed in cross-examination that for a short time following the Dissolution Agreement, he and Barry were not speaking to each other.
In 1990, following the split, Rosekay was owned effectively one half by Mrs Berger (26 A class, 24 D class, 10 E class and 10 I class ordinary shares), one quarter by Mrs Rosenberg (26 B class and 10 F class ordinary shares) and one quarter by Rangeway as trustee for the Family Trust (24 C class, 5 G class and 5 H class ordinary shares).
According to the minutes of a meeting of the directors of Fifteenth Eestin, said to have been held on 21 November 1990 and attended by Mr Rosenberg and Mrs Berger, it was resolved to make a distribution from the Capital Profits Reserve of the Investment Trust of $4,000 to Mrs Rosenberg and $81,083 to Mr Rosenberg. The minutes were signed by Mr Rosenberg as chairman.
Although the records lodged with ASIC showed that Mr Berger became a director of Fifteenth Eestin and Rosekay on 17 May 1991, no minutes were produced of any meeting of directors at which such appointments were said to have been made.
There was disagreement between the parties over the role played by Mr Rosenberg in the affairs of Rosekay/Project Hardware and the Investment Trust following the Dissolution Agreement. In his first affidavit, Mr Berger said he and his wife had managed the Investment Trust's affairs since then and that from that time Mr Rosenberg had had little or no involvement in the running of the Investment Trust, although he and his wife had kept Mr Rosenberg regularly informed of matters pertaining to the Trust. Mr Berger said that he had "devoted an untold number of hours to managing the affairs and properties" of the Investment Trust since October 1990 and had never sought "any salary or remuneration" for his efforts.
Mr Berger said in his second affidavit that over the years Mr Rosenberg's interest in the affairs of the Investment Trust had dwindled to the point of being almost non-existent, until the middle of 2004. Mr Berger said that Mr Rosenberg sought minimal information as to what was going on, and left it to him and his wife to take care of the assets of the Investment Trust. He said that as they had a close relationship with Mr Rosenberg, they used to discuss the affairs of the Investment Trust with him, to the extent of his limited interest in its affairs. In response to a suggestion that the assets of the Investment Trust were in jeopardy, Mr Berger said that the corner properties were "passive assets" and "unlike an operational business" did not require "full-time supervision".
Mr Rosenberg disputed the suggestion that he was not involved in the affairs of the Investment Trust, particularly in respect of the new buildings which had been built on two of the corner properties. He said that he was "actively involved" in their redevelopment. However, he agreed that since then he had not had "a lot" to do with the management of the Investment Trust and had done "very little" because he was "semi retired".
Another point of contention was how much information Mr Rosenberg was given by the Bergers about the affairs of the Investment Trust. It was common ground that formal directors' meeting were not held and that the minutes were prepared by the accountants. The minutes and other documents requiring signatures were generally signed in batches with Mr Berger holding the pages open and pointing to where Mr Rosenberg or Mrs Berger had to sign. An unresolved question was how much information about a particular document Mr Rosenberg was able to absorb in this process.
Part of the defendants' case relied on Mr Rosenberg having signed documents authorising transactions about which he now complained. However, he gave evidence that in the last ten years or so he simply signed anything put in front of him by Mr Berger because he trusted him. The documents were always put to him by Mr Berger. Mr Rosenberg said that he never asked what the document was. Mr Berger just turned the page over and said "sign here". According to Mr Rosenberg, Mr Berger "never read anything to me or told me anything about it."
Whilst I do not doubt that the procedure of signing documents was as described by Mr Rosenberg, I do not accept that, in the early years, he was not aware of the type of document he was asked to sign or of its significance. I consider that either through his own observations or from questions asked by him he would have been well aware during that period of what and why he was signing. His keen interest in the affairs of Rosekay and Fifteenth Eestin did not disappear overnight.
According to the minutes of a meeting of the directors of Fifteenth Eestin, said to have been held on 28 June 1991 and attended by Mr Rosenberg and Mrs Berger, it was resolved to make the following distribution of the net income of the Investment Trust: $400 to Antony Berger, $39,600 to the E Rosenberg No. 2 Trust and "the balance" to Rosekay. The minutes were signed by Mr Rosenberg as chairman. Mr Rosenberg agreed that if he had not objected to past distributions, it was because he did not dispute them.
On 13 December 1991 the report of the directors of Fifteenth Eestin for the financial year ended 30 June 1991 and the statement by directors were both signed by Mr Rosenberg and Mr Berger. The report clearly stated that "the directors in office at the date of this report" were Mr Rosenberg and Mr and Mrs Berger. This situation was repeated in the following year by documents signed on 16 December 1992, in the 1993 financial year by documents signed on 5 October 1993 and in the 1994 financial year by documents signed on 16 December 1994, but this time the directors’ report for the financial year ended 30 June 1994 was on two pages so that Mr Rosenberg's signature was not on the same page as the names of the directors. I consider that, in the circumstances, Mr Rosenberg could hardly maintain that he was unaware that Mr Berger was acting as a director of Fifteenth Eestin.
According to the minutes of a meeting of the directors of Fifteenth Eestin, said to have been held on 30 June 1992 and attended by Mr and Mrs Berger and Mr Rosenberg, it was resolved to make the following distribution of the income of the Investment Trust: $20,000 to Mr Rosenberg, $20,000 to Mrs Rosenberg and "the balance" to Rosekay. The minutes were signed by Mr Berger as chairman. Fifteenth Eestin's income tax return for the financial year ended 30 June 1992 clearly revealed that $20,000 had been distributed to Mr Rosenberg, $20,000 to Mrs Rosenberg and $145,663 to Rosekay. Every page of the tax return was signed by Mr Rosenberg. Thus, I consider that Mr Rosenberg would have been aware of the persons to whom the distributions were made in that year.
In 1992 Rosekay moved into the premises at 457 Hoddle Street. Over the next four years or so it made substantial renovations to the building, including the construction of a second storey and an amenities block. The expenses incurred by Rosekay formed part of the loan account owed by the Investment Trust to Rosekay. It commenced paying rental at $84,000 per annum.
In about August 1992 Mr Berger and Mr Same became aware that Fifteenth Eestin had made distributions to Rosekay, both before and after the execution of the Dissolution Agreement in November 1990, when it was not a beneficiary. Mr Same also had the idea that it might be advantageous to be able to distribute income to other companies. It appears that Mr Rosenberg's solicitor, Mr Harry Harris, was then consulted because by a letter dated 22 January 1993, Mr Harris wrote to Mr Barry Rosenberg's solicitors, Jerrard and Stuk, concerning the need to have Barry, his wife and children removed as beneficiaries of the Investment Trust, the Family Trust and the No. 2 Trust, as had been agreed in the Dissolution Agreement. Mr Harris sought confirmation that in November 1990 Mr and Mrs Barry Rosenberg had executed declarations that they and their infant children were no longer beneficiaries of the three Trusts. Apparently, they had not done so. Further, by a letter dated 5 February 1993 Mr Harris wrote to Mr Same advising him that in his view Rosekay could not be made a beneficiary of the Investment Trust, the Family Trust or the No. 2 Trust, as it did not belong to the classes of beneficiaries referred to therein. Mr Harris advised that in order to introduce Rosekay as a beneficiary a Supplemental Trust Deed was required in each case. He said that this might involve "taxation ramifications". Mr Harris also referred to the unresolved issue raised in his letter to Jerrard and Stuk. By a letter dated 22 February 1993 Mr Harris wrote to Mr Tom May of Herbert Geer & Rundle advising him that Mr Berger or Mr Rosenberg would be instructing him directly to amend the trusts to overcome the problem posed by Barry and his family remaining as beneficiaries and to enlarge the classes of beneficiaries entitled to benefit under the terms of the Trust Deeds.
It appears that Mr May drafted a similar set of documents for each trust. Those relating to the Investment Trust were as follows:
(a)A Deed deleting the limitation on the power of amendment of the Trust Deed prohibiting the addition as a beneficiary of a "person not related to the specified beneficiaries by blood or marriage";
(b)a Deed adding as a new class of beneficiary any company nominated by the trustee;
(c) a Deed by Fifteenth Eestin nominating Rosekay as a beneficiary;
(d)a Deed by Lionel Rosenberg (Mr Rosenberg's brother) assigning his interest as a beneficiary to Rosekay;
(e)a Deed giving the trustee the power to declare that one or more beneficiaries were no longer beneficiaries;
(f)a Deed declaring that Barry, his issue, Sara and her issue were no longer beneficiaries.
In about May 1993 Mr Lionel Rosenberg executed a Deed which purported to assign his interest as a beneficiary in the Investment Trust to Rosekay. Mr Berger backdated that document to 19 June 1989. In an attempt to cover up the backdating, he used an old seal of Rosekay without an ACN and procured his wife to sign the Deed using her maiden name.
By an undated Deed Fifteenth Eestin declared that henceforth Barry, the issue of Barry, Sara and the issue of Sara would not be beneficiaries of the Investment Trust. The document was signed by Mr Rosenberg and Mrs Berger. Mr Rosenberg said that he gave Mr Harris instructions to prepare this document.
On 1 June 1993 the company S & I Investments was registered. On the following day Mr and Mrs Berger were appointed directors. They were the original shareholders.
On 23 June 1993 Fifteenth Eestin, by a document signed by Mr Rosenberg and Mrs Berger, nominated S & I Investments as a beneficiary of the Investment Trust. According to the minutes of a meeting of the directors of Fifteenth Eestin, said to have been held on 30 June 1993 and attended by Mr and Mrs Berger and Mr Rosenberg, it was resolved to make the following distribution of the income of the Investment Trust: $20,000 to Mr Rosenberg, $20,000 to Mrs Rosenberg and "the balance" to S & I Investments. The minute was signed by Mr Berger as chairman. Fifteenth Eestin's income tax return for the financial year ended 30 June 1993 clearly revealed that $20,000 had been distributed to Mr Rosenberg, $20,000 to Mrs Rosenberg and $165,952 to S & I Investments. Every page of the tax return was signed by Mr Rosenberg. He agreed in cross-examination that at this time he was fairly active in the affairs of Delf Brass and Fifteenth Eestin. Again, I consider that Mr Rosenberg would have been aware of what had occurred.
Thereafter, distributions were regularly made to S & I Investments and Rosekay/Project Hardware, purportedly after meetings of directors of Fifteenth Eestin attended by Mr and Mrs Berger and Mr Rosenberg. Mr Berger signed all of the minutes in question as chairman. A complete list of the distributions made to Rosekay/Project Hardware and S & I Investments between 1 July 1991 and 30 June 2003 according to these minutes is as follows:
Date
S & I Investments
Rosekay/Project Hardware
30 June 1992 ― The balance after $40,000 30 June 1993 The balance after $40,000 ― 30 June 1994 The first $50,000 The balance 30 June 1995 $50,000 The balance 29 June 1996 $15,000 The balance 30 June 1997 ― 100% of $185,834 30 June 1998 The balance after $6,000 ― 30 June 1999 100% of $168,703 ― 30 June 2000 100% of $160,894 ― 30 June 2001 100% of net income ― 30 June 2002 ― ― 30 June 2003
The balance
$299,000
Total $792,640 $1,027,978
Mrs Bloom Rosenberg died on 24 October 1993. Her 25.7% shareholding in Rosekay passed to her husband.
On 17 February 1994 Mr Rosenberg ceased to be a director of Rosekay and Mistirose, and Mr Berger became a director of Mistirose. On 18 April 1994 Mrs Berger's second child, Sophie, was born.
According to Mrs Berger's first affidavit, in late 1994 Mr Rosenberg told her and her husband that he wished to sell his apartment in South Yarra and divide the proceeds of the sale amongst his five grandchildren, so that they would receive something from him during his lifetime. Mrs Berger said that Mr Rosenberg emphasised to them that, because he had rearranged the family asset affairs in 1990 so that the assets of the Investment Trust would be Mrs Berger's after his death, once he sold his apartment it would be up to Mr and Mrs Berger to provide him with a place to live and look after him in his old age. Mrs Berger said that she agreed to do so. She also said that at about this time her father gave her a copy of the 1988 will. In her third affidavit, Mrs Berger said that at the meeting in 1994 her father said words to the effect that they would have to buy an apartment for him to live in, because the proceeds of sale of his South Yarra apartment was for the kids. He then added words to the effect that because all the assets had been split up, they had to look after him. She said that she assured him that looking after him was not a problem.
Mr Berger gave similar evidence. In his fourth affidavit he said that Mr Rosenberg said to them that because he had split up his assets between Barry and Sabrina, and was giving the proceeds of his apartment to his five grandchildren, Sabrina and Ian would have to buy an apartment for him to live in, and be responsible for looking after him in the future. Mr Berger said that he suggested that they could buy an apartment using their superannuation fund.
In late 1995 Mr Rosenberg sold his apartment at 2/371 Toorak Road, South Yarra and invested the proceeds on term deposits for his five grandchildren ( Emma, Marnie and Jarrod Rosenberg and Antony and Sophie Berger). Between about August 1995 and May 1998 Emanuel lived in an apartment which he chose in Stanhope Court, South Yarra, but which was purchased by Mistirose Pty Ltd. The contract of sale dated 24 June 1995 was signed by Mr Rosenberg, on behalf of Mistirose, even though he was no longer a director of that company.
The informing, representations and promises allegedly made by Mr Rosenberg to Mr and Mrs Berger in 1994 were pleaded in paragraph 29 of the defence and counterclaim. They were referred to as "the 1994 promises" and were said to be that:
(a)Mr Rosenberg told Sabrina and Ian that he would sell his apartment in South Yarra and divide the proceeds of sale amongst his five grandchildren, but that he expected Sabrina and Ian to see that he had a place in which to live;
(b)he represented to Sabrina and Ian, and promised them, that Sabrina would get everything on his death pursuant to the 1988 will; and
(c)he repeated his earlier representation and promise that the assets of the Investment Trust
(i)would be, and remain, managed and controlled by Sabrina and Ian;
(ii)would be used for his benefit and for the benefit of Sabrina while he was alive;
(iii) would be for the sole benefit of Sabrina after his death.
On 28 September 1995 Mr Rosenberg executed a codicil to the 1988 will. By that codicil, he confirmed the appointment of Mrs Berger as sole executrix and trustee of the will, made specific requests of $70,000 to each of his five grandchildren, and, his wife having died, left his residuary estate to Mrs Berger, or if she predeceased him to such of her two children who survived him and attained the age of 25 years.
On 19 June 1996 the company Project Hardware (Vic) Pty Ltd ("PHV") was registered and Mr and Mrs Berger were appointed directors.
In about 1996 it was decided that the old building at 168-174 Alexandra Parade would be demolished and a new building constructed thereon for Delf Brass. According to Mrs Berger, her husband managed the development project, arranging sub-contractors and materials. Mr Rosenberg disputed that Mr Berger had played any significant role in this development. He said that a project manager was engaged. In addition, Mr Rosenberg said that he was at the site every day. The cost of construction of $1.466 million was funded by the Investment Trust as follows:
(a) $400,000 from its own account with Macquarie Bank;
(b)$550,000 lent by Macquarie Bank, which Project Hardware repaid;
(c) $300,000 lent by Project Hardware;
(d) approximately $116,000 lent by Mistirose; and
(e) $100,000 lent by SFSG.
Since the end of 1996 Project Hardware has leased the new building. In September 2004 it was paying rental of $220,000 per annum.
In October 1996 Rangeway purchased Unit 5, Park Lane in Surfers Paradise with funds provided by Fifteenth Eestin by way of unsecured loans. It was a two bedroom apartment. It was Mr Rosenberg who used his knowledge of real estate and Surfers Paradise to locate the unit. Mr Rosenberg used the apartment as did the Berger family. He said that he used it because he purchased it: "I didn’t have to get permission from anybody."
On 23 April 1997 Mr Rosenberg executed a second codicil to the 1988 will, which altered the timing of the distributions to his grandchildren, but otherwise confirmed the contents of the will and the first codicil. Mrs Berger said that her father gave her copies of the two codicils to the 1988 will.
In 1997 Mr Rosenberg wrote his six page memoirs which contained a fascinating account of his early life. In his memoirs Mr Rosenberg had this to say about Delf Brass:
"Some time later we bought a company called Delf Brass, a business importing brass handles. We had a lot of success from humble beginnings, but due to bad management and not enough effort on my part, and trusting people too much, it went down somewhat. After my daughter Sabbie, who was in the office in the early part, married, she and her husband Ian took over and I am happy to say it is a thriving, successful operation."
He concluded his memoirs with the following statement:
"After I had the bypass, I decided to give all my wealth and business in equal halves, to Barry and Sabbie. Despite all the criticism and ill feeling, it's my idea to do what I thought best, since I have worked hard for it to do it my way!"
Mr Rosenberg agreed in cross-examination that what he had said in his memoirs was true.
In October or November 1997 the property at 457 Hoddle Street was leased to AKI Australia Pty Ltd. In September 2004 the property was still tenanted to that company at an annual rental of about $150,000. In the four financial years ended 30 June 2004 the Investment Trust spent about $128,000 on improvements to the property.
According to the minutes of a meeting of the directors of Fifteenth Eestin, said to have been held on 30 June 1998 and attended by Mr and Mrs Berger and Mr Rosenberg, it was resolved to make the following distribution of the income of the Investment Trust: $3,000 to Mr Berger, $3,000 to Mrs Berger and "the balance" to S & I. The minutes were signed by Mr Berger as chairman. As previously mentioned, it was common ground that Mr Berger was not a beneficiary of the Investment Trust. It appears that this error came about because Mr Same, who effectively made the decisions about the income distributions based on tax minimisation grounds, believed that Mr Berger was a beneficiary of the Investment Trust. Mr Berger said in cross-examination that he may not have noticed that he was to receive a distribution when he came to sign the minutes. Alternatively, he said that he may have acquiesced in Mr Same's suggestion. Eventually, Mr Berger acknowledged in cross-examination that he knew in 1998 that a trustee was permitted to make distributions of income only to a beneficiary. But he said that at that time he did not know that he was not a beneficiary of the Investment Trust. That only became clear when this dispute arose.
In September 1998 Mr Berger and Mr Same considered whether to make a capital distribution. The idea originated with Mr Same. The reason for making the capital distribution was to offset debit loan accounts and avoid a potential tax detriment in the future. If an individual, such as Mrs Berger, had a debit loan account with the Investment Trust (that is, owed the trust money), and a company, such as Project Hardware, had a credit loan account with the Investment Trust (that is, the trust owed it money), the Tax Office could deem there to be a dividend from the company to the individual. It was said that it was possible that if the capital distribution had not been made, Mr and Mrs Berger could have been assessed for tax on a deemed dividend of about $1 million each. The total tax payable by the two of them would have been close to $1 million. The potential tax problem had been created by the size of the borrowings that Mrs Berger and others had made from the trust. The capital distribution itself would not attract income tax, because at that time it was legitimate to revalue an asset, distribute it to a beneficiary and reduce the loan account without having an income tax consequence.
According to Mr Berger, a valuation of the three corner properties was arranged by Mr Rosenberg at the request of Mr Berger in about September 1998. Mr Rosenberg said that he could not recall whether Mr Berger explained what the valuation was for. By a letter dated 16 November 1997, Mr Peter Smyth of the real estate firm of K & P Smyth wrote to Mr Rosenberg giving his opinion that should the three corner properties be offered for sale the aggregate price would be in the vicinity of $4.5 million. It appears that this letter was probably received in September 1998. By a letter dated 16 October 1998 Webb Martin advised the defendants' accountant, Mr Norman Same, concerning the tax implications of an asset revaluation by Fifteenth Eestin. The capital distribution resulted in $2,085,777 being paid into the joint loan account of Mr and Mrs Berger.
Mr Berger said in his fifth affidavit, sworn on 17 February 2006, that in consultation with Mr Same, he and his wife decided that they would proceed with the capital revaluation and make a capital distribution to Sabrina. He said that the capital distribution of $2,085,777 was made to Mrs Berger alone, and was applied as a credit against the loan account in the joint names of Sabrina and him. Mr Berger said that his wife was entitled to utilise the capital distribution to her in whatever manner she chose.
Mr Berger also pointed out that as part of the process of making the capital distribution, other loan accounts, including Mr Rosenberg's debt to the Investment Trust of $153,021, were cleared up. Book entries were made debiting these other loan accounts to the loan account in the name of Mr and Mrs Berger.
There was no minute found of a meeting of the directors of Fifteenth Eestin regarding the capital distribution. Thus, Mr Berger could not point to any resolution supporting his claim that the capital distribution was made to Mrs Berger alone. On the other hand, the capital distribution was recorded in the Investment Trust's general journal as being applied to the Bergers' joint loan account. The account that was credited was a joint loan account, even though there were separate loan accounts in Mrs Berger's name and Mr Berger's name. In response to Mr Berger's query in August 2004 about this transaction, Mr Same had emailed the response that "we declared a non taxable distribution to you and Sabbie." There was no reason for those handling the capital distribution not to make it to Mr and Mrs Berger jointly, because at that time it was mistakenly thought that Mr Berger was a beneficiary of the Investment Trust and therefore entitled to receive the $3,000 income distribution also made in the financial year ended 30 June 1998. Finally, Mrs Berger gave evidence that she did not participate in the decision to make a capital distribution and that she made no decision that the distribution to her would be divided in the accounts of the trustee equally between her and her husband. I therefore conclude that the capital distribution was made to Mr and Mrs Berger jointly, when Mr Berger was not a beneficiary.
Between about June 1998 and June 2002 Mr Rosenberg lived in an apartment at 6/555 Toorak Road, Toorak. This property was purchased by Mistirose for $505,000 at his request. The contract of sale dated 19 April 1998 was signed by Mr Rosenberg, on behalf of Mistirose, even though he was no longer a director of that company and Mr Berger was also present at the auction. The property was later sold for $260,000 more than it cost. As the owner, Mistirose received the benefit of this capital gain.
The last time Mr Rosenberg signed a document as a director of Fifteenth Eestin was on 14 June 2000 when he and Mr and Mrs Berger signed a resolution concerning the 2000 Annual Return.
In 2000 the old building on the property at 477 Hoddle Street was demolished and a new building was constructed with a loan from Macquarie Bank of about $772,000. Again, Mr Rosenberg disputed that Mr Berger had played any significant role in this redevelopment. He said that a builder was contracted. Again, he said that he was at the site every day. In December 2000 the property was leased to Kaylock, a company in which Mr and Mrs Berger now had a 50% interest through S & I Investments. In September 2004 the property was still tenanted by Kaylock at a rental of about $155,000 per annum.
Between about June 2002 and February 2004 Mr Rosenberg lived with his daughter and her family at 7 Towers Road, Toorak. Construction of the Towers Road home commenced in August 2000, partly with funds lent by the Investment Trust. In the financial year ended 30 June 2001 the Investment Trust lent Mrs Berger $975,240. It used $110,000 of its own funds on deposit with Macquarie Bank and borrowed $260,000 from Rangeway, $325,000 from Project Hardware and $40,000 from Mistirose. In the financial year ended 30 June 2002 the Investment Trust lent Mrs Berger $1,133,620. In April 2002 she paid $1,500,000 from the proceeds of her former home at 14 Como Avenue, South Yarra to the Investment Trust.
According to Mrs Berger the cost of construction and fit out of the Towers Road house was approximately $4 million. She agreed that, at the time of the hearing, the value of the property was between $7 and $10 million. The house has five bedrooms, including one intended for Mr Rosenberg, four en suites, a billiard room, a theatre room incorporating a gymnasium, an eight-car garage, a swimming pool and a tennis court.
In August 2002 Rangeway sold Unit 5 and purchased Unit 701, Park Lane in Surfers Paradise again with funds provided by Fifteenth Eestin. This was a three bedroom apartment. Its purchase obviously upset Mr Rosenberg. In cross-examination he said that "nobody asked me if I wanted to buy it … I was told after it was purchased." He queried how this could have been done when he was one of the two directors of Rangeway. However, he said that he did not object at the time: "What's the good of objecting after it's been purchased." Mr Rosenberg said that he only used this apartment "for six days." His other complaint was that the two bedroom apartment was bigger than the three bedroom apartment and the three bedroom apartment was on "the wrong side of the building."
On 26 May 2003 Mr Rosenberg met with the Bergers' friend and solicitor Mr Vann Fisher at the Bergers' home. Mr and Mrs Berger were also present. Mr Fisher said in his first affidavit, sworn on 12 December 2005, that prior to this meeting, he had had three meetings at his office with Mr and Mrs Berger in April and May 2003 concerning a range of issues including asset protection, a review of corporate and trust structures, and wills and estate planning matters. Mr Berger had told him that Ernst & Young had been engaged to provide advice in regard to a proposed restructure of entities. Mr Fisher said that he was asked by Mr and Mrs Berger to discuss some of these issues with Mr Rosenberg. According to a running sheet prepared by Mr Fisher's assistant recording matters discussed in the meetings between Mr and Mrs Berger and Mr Fisher, one of the issues Mr Fisher was asked to explain to Mr Rosenberg was the "need to remove E Rosenberg and E Rosenberg Family Trust as shareholder" of Project Hardware. The note also recorded that Mr and Mrs Berger had advised that Mr Rosenberg would "not be happy with removal". They were to "broach" the subject with him. In cross-examination, Mr Fisher said that the word "remove" was inappropriate, as what was being proposed was that a shareholding in one company would be transferred in return for a shareholding in another company.
Mr Fisher said that he told Mr Rosenberg at this meeting that as a result of the proposed corporate restructure Mr Rosenberg would be required to transfer his shares in Project Hardware. Mr Fisher said that Mr Rosenberg replied that he was agreeable to that, subject to there being no problem in relation to any capital gains tax issues. Mr Fisher said that he also told Mr Rosenberg that as he had no ongoing involvement with the Investment Trust, which was being managed by Ian for Sabrina and the children, it was appropriate that in tidying up the paperwork, if Mr Rosenberg was still the appointor, he should resign in favour of his daughter and that the arrangements entered into in 1990, whereby Sabrina and Ian had been in control, had to be "formalised". Mr Fisher said that Mr Rosenberg "readily agreed to that". According to Mr Fisher, similar issues were raised in respect of the Family Trust and again Mr Rosenberg agreed. Mr Fisher said that new wills for Mr and Mrs Berger and Mr Rosenberg were discussed. He said that the issue was raised by Mr Rosenberg who wanted to ensure that provision would be made in the wills of Mr and Mrs Berger for his maintenance, in case they happened to predecease him. Mr and Mrs Berger agreed to this. Mr Fisher said that he also raised concerns about the inter-relationship of his existing will and codicils, and that Mr Rosenberg instructed him to prepare a new will to ensure that the residue of his estate passed to Mrs Berger if she survived him, and to her children if she predeceased him. None of the documents mentioned in this meeting were ever prepared because, Mr Fisher said, he was waiting on the advice as to the final form of the corporate restructure, so that all of the required documents could be finalised at the same time.
Mr Berger gave a similar account of the meeting of 26 May 2003 in his third affidavit, sworn on 21 December 2005.
Mr Rosenberg denied that he agreed to resign as appointor of the Investment Trust. He said that he never agreed with Mr Fisher's statement about Sabrina and Ian being in control of the Investment Trust since 1990 or that anything needed to be "formalised".
On 25 June 2003 the Macquarie Bank entered into an agreement to lend Fifteenth Eestin, Rangeway and Mr and Mrs Berger $3 million. A deed of guarantee and indemnity in favour of Macquarie Bank was executed.
In 2003 Mr and Mrs Berger were planning to spend $135,000 on improving the three bedroom apartment in Surfers Paradise. Mr Rosenberg saw that a new apartment block, the Maquis on Main, was being built next door. He thought these apartments would be better than the Park Lane apartment. He therefore recommended to his daughter and son-in-law that if they could get their money back on the one they had bought they would be better off buying a three bedroom apartment at the Maquis. He said that he was not consulted about the financing of this purchase. However, on 16 June 2003 Mr Rosenberg and Mrs Berger did sign as directors of Rangeway a contract of sale for the purchase by Rangeway of Lot 6 at the Maquis on Main for $846,000. They were also named as guarantors of Rangeway. Mr Rosenberg has never visited the new apartment. Again this seemed to be a matter of some tension on the part of Mr Rosenberg. He said that he did not necessarily expect to be able to use the property, but "if I'm asked, maybe." He saw it as "a matter of ethics … If you're asked maybe you'll use, if you don’t get asked, you don’t use it."
On 10 September 2003 the company Jassi Investments Pty Ltd ("Jassi") was registered. Both Mr and Mrs Berger were appointed directors of Jassi and each of them holds one share in the company. Jassi is the trustee of the Berger Family Trust, which was established on that day. By a contract of sale dated 24 October 2003 Jassi purchased Lot 6, Maquis on Main, for $846,000. Mr and Mrs Berger signed as directors of Jassi. They were also named as guarantors of Jassi. Mr Berger said that the purchase of the new apartment by the new family trust was done on the advise of Mr Fisher. On 12 May 2004 Fifteenth Eestin received $794,000 from Macquarie Bank and loaned it to Jassi.
On 9 October 2003 there was a second meeting at the Bergers' home, this time between Mr Fisher, Mr Rosenberg and Mr Berger. Mr Fisher said that he told Mr Rosenberg that part of the proposed corporate restructure involved the establishment of a new company, Project Hardware (Australia) Pty Ltd ("PHA"), and that Mr Berger was to put the 50% shareholding of S & I Investments in Kaylock into PHA. Mr Fisher said that he suggested to Mr Rosenberg that it was therefore appropriate that, through his will, his shareholding in PHA stay within the Berger family after his death, and that Mr Rosenberg agreed to do this, telling Mr Fisher to prepare a will for him in which his shares in PHA would be left to Mrs Berger, or if she predeceased him, then in a testamentary trust for her two children and Mr Berger's daughter by his first marriage.
Mr Rosenberg denied that he ever agreed that any shareholding of his in PHA should remain within the Berger family after his death. He said that he did not know what the restructure was intended to achieve, and what it did achieve, and that he did not understand what role PHA played in the restructure.
On 25 October 2003 Mr Berger was allotted 16 J class ordinary shares in Project Hardware. On 31 October 2003 Mrs Berger ceased to be a director of Project Hardware and Mistirose.
On 26 November 2003 PHA was registered with Mr Berger as the sole director. Following a restructure, PHA owns all of the A, B, C, D, E, F, G, H, I and J class shares in Project Hardware, and all of the shares in S & I. The owners of those shares were issued with equivalent holdings in PHA. Mr Rosenberg now owns all 2,574,000 B class shares in PHA, or 30.02% of the total shareholding. Mr Berger estimated that they were worth about $3 million. Mr Same acknowledged that the capital value of the shares in PHA reflected to some extent the director's power to discriminate in declaring dividends. Mrs Berger's D class shares were bought back by PHA for approximately $3 million. Rather surprisingly, Mr Berger was unable to give a more precise figure. Mr Rosenberg was not told that this buy back was going to take place.
By a Deed dated 28 November 2003 Rangeway retired as the trustee of the Family Trust and Mr Rosenberg signed a document appointing PHV as the new trustee. The 24 C class, 5 G class and 5 H class ordinary shares in Project Hardware held by Rangeway were transferred to PHV on 28 November 2003 at their market value of $2,376,000. On 5 December 2003 those shares were acquired by PHA pursuant to the restructure and in consideration therefore PHV was issued with 24 C class, 5 G class and 5 H class ordinary shares in PHA. The market value of these new shares on the date of issue was $2,376,000. On 11 December 2003 PHV sold the shares it held in PHA to Ashmoore Pty Ltd ("Ashmoore") at their market value of $2,376,000. Ashmoore is the trustee of The Emanuel Rosenberg Family Trust (No. 2) ("the No. 2 Family Trust"), which was established on that day. The purchase money for the shares was lent by PHV as trustee of the Family Trust to Ashmoore/the No. 2 Family Trust. In correspondence between the solicitors for the parties to this dispute it was said by the Bergers' solicitors that this trust was given Mr Rosenberg's name "as a sign of affection" but that it had "no connection" to him. The latter statement was not correct because, as a parent of Mrs Berger who was a Specific Beneficiary, Mr Rosenberg was a General Beneficiary of the No. 2 Family Trust.
On 30 January 2004 Mr and Mrs Berger as the directors of PHV resolved that 100% of the net income of the Family Trust be distributed to Mrs Berger. At a second meeting held on the same day Mr and Mrs Berger as the directors of PHV resolved to appoint 30 January 2004 as the Vesting Day of the Family Trust and that "the capital of the Trust Fund be distributed in its entirety" to Mrs Berger.
Since February 2004 Mr Rosenberg has lived at 106/1 Wallace Avenue, Toorak, which he selected, but which Mistirose purchased for $1.535 million by a contract of sale dated 19 December 2003. Mr and Mrs Berger paid for much of the furnishing of the apartment. Mr Rosenberg spoke to Mr Berger, who was overseas at the time, and obtained his consent to the purchase in the name of Mistirose.
By 30 June 2004 Mrs Berger did not owe anything to the Investment Trust but it owed her $69,160.
According to Mr Berger, on about 22 March 2004 he unintentionally upset Mr Rosenberg by telling him he was "crazy" not to attempt a reconciliation between his son and daughter. Mr Rosenberg said in his second affidavit that what Mr Berger had said was that "all you Rosenbergs are mad." He denied that it was this incident alone which caused the difficulties between the Bergers and him. Rather, he said, "the incident was the culmination of matters which gave rise to increasing distress" on his part.
On 29 March 2004 Mr Rosenberg signed a Revocation of Power of Attorney of any powers of attorney previously given to Mrs Berger and/or to Mr Berger. This document was sent to them by a letter dated 28 July 2004 from Mr Rosenberg's solicitors.
On 21 April 2004 Mr Rosenberg executed a new will. By that will, he appointed his son executor, or if he predeceased him, his daughter-in-law. Mr Rosenberg divided his estate into two equal trusts – one for his grandchildren and great grandchildren and one for Jewish Care (Victoria) Inc.
As previously stated, by a Deed of Removal and Appointment dated 15 July 2004 Mr Rosenberg purported, pursuant to the powers contained in cl.10A of the Deed of Settlement of the Investment Trust, to remove Fifteenth Eestin as the trustee of the Investment Trust and to appoint Glen Oak as the trustee. The sole director and shareholder of Glen Oak is John David Adams, a partner in the firm of accountants Horwaths. Mr Adams was approached by a member of the plaintiffs' firm of solicitors. On 15 July 2004 Glen Oak executed a consent to act as trustee of the Investment Trust. Mr Barry Rosenberg gave Mr Adams an indemnity in respect of any actions he took in relation to the trusteeship.
On 16 July 2004 Glen Oak signed an authority directing Fifteenth Eestin to deliver up documents, property and income. Failing a satisfactory response, the plaintiffs commenced this proceeding on 6 August 2004. Shortly before the litigation was launched, Mrs Berger on behalf of Fifteenth Eestin offered, via a solicitor's letter dated 30 July 2004, to pay to Mr Rosenberg all of the net income of the Investment Trust as a way of resolving this dispute.
On 27 October 2004 Mr Rosenberg executed a new will. By that will he established a testamentary trust for those of his grandchildren who are the children of his son Barry.
On 2 December 2004 Project Hardware increased the salary paid to Mr Rosenberg from $20,800 per annum to $31,200 per annum, following a request from him that Fifteenth Eestin pay him $8,000 per month, net of tax.
Relevant Legal Principles
The parties were largely in agreement as to the relevant legal principles governing a dispute such as this. The decision of the High Court of Australia in Waltons Stores (Interstate) Pty Ltd v Maher[1] is an obvious starting point. In their judgment Mason CJ and Wilson J said that the doctrine of promissory estoppel:
"extends to the enforcement of voluntary promises on the footing that a departure from the basic assumptions underlying the transaction between the parties must be unconscionable. As failure to fulfil a promise does not of itself amount to unconscionable conduct, mere reliance on an executory promise to do something, resulting in the promisee changing his position or suffering detriment, does not bring promissory estoppel into play. Something more would be required. Humphreys Estate[2] suggests that this may be found, if at all, in the creation or encouragement by the party estopped in the other party of an assumption that a contract will come into existence or a promise will be performed and that the other party relied on that assumption to his detriment to the knowledge of the first party ... On the other hand the United States experience ... suggests that the principle is to be expressed in terms of a reasonable expectation on the part of the promisor that his promise will induce action or forbearance by the promisee, the promise inducing such action or forbearance in circumstances where injustice arising from unconscionable conduct can only be avoided by holding the promisor to his promise."[3]
[1](1988) 164 CLR 387.
[2]Attorney-General (Hong Kong) v Humphreys Estate Ltd [1987] 1 AC 114.
[3](1988) 164 CLR 387 at 406.
In a well known passage, Brennan J said:
"In my opinion, to establish an equitable estoppel, it is necessary for a plaintiff to prove that (1) the plaintiff assumed that a particular legal relationship then existed between the plaintiff and the defendant or expected that a particular legal relationship would exist between them and, in the latter case, that the defendant would not be free to withdraw from the expected legal relationship; (2) the defendant has induced the plaintiff to adopt that assumption or expectation; (3) the plaintiff acts or abstains from acting in reliance on the assumption or expectation; (4) the defendant knew or intended him to do so; (5) the plaintiff’s action or inaction will occasion detriment if the assumption or expectation is not fulfilled; and (6) the defendant has failed to act to avoid that detriment whether by fulfilling the assumption or expectation or otherwise."[4]
[4](1988) 164 CLR 387 at 428-429.
Counsel for the plaintiffs put at the forefront of their submission the following statement of principle by Priestley JA in Austotel Pty Ltd v Franklins Selfserve Pty Ltd
"For equitable estoppel to operate there must be the creation or encouragement by the defendant in the plaintiff of an assumption that a contract will come into existence or a promise be performed or an interest granted to the plaintiff by the defendant, and reliance on that by the plaintiff, in circumstances where departure from the assumption by the defendant would be unconscionable."[5]
[5](1989) 16 NSWLR 582 at 610.
On the other hand, counsel for the defendants relied on a summary of the principles of estoppel by promise or representation by Ashley J, as his Honour then was, in Pearson v Williams[6]. His Honour said that he extracted his principles from cases such as Giumelli v Giumelli,[7] Flinn v Flinn,[8] Gillett v Holt[9] and Rogers v Rogers.[10] They were as follows:
[6][2001] VSC 509.
[7](1999) 196 CLR 101.
[8][1999] 3 VR 712.
[9][2001] Ch 210.
[10][2001] VSC 141.
"66.First, the relief primarily sought by the plaintiffs is the erection of a constructive trust. The connotation of that term in a case of the present kind was explained in the majority judgment in Giumelli.[11]
[11](1999) 196 CLR 101 at [2]-[5].
67.Second, in such cases the constructive trust, proprietary in nature, is founded in an equity which arises from an assumption or expectation as to the future acquisition of ownership of property which has been induced by representations upon which there has been detrimental reliance by the plaintiff.[12]
[12]Giumellii at [5]-[6].
68.Third, equity is relevantly concerned to prevent unconscionable conduct on the part of the defendant. That is why, if a plaintiff is to succeed in such a case, something more is needed than simply a promise or representation in reliance upon which acts are done or omitted to be done. The ‘something more’ may take the form of creation or encouragement of an assumption or expectation that the promise will be performed or representation made good; and reliance upon that assumption or expectation.
69.Fourth, depending on the circumstances, a promise to leave property by a will is to be understood to be a promise not of making a revocable testamentary instrument, but of a gift by will taking effect on death.[13]
[13]Flinn at [75]-[76].
70.Fifth, in considering whether a promise or representation is capable of founding an estoppel, as being sufficiently certain, the authorities exhibit a liberal approach.[14]
[14]Flinn at [80]-[94].
71.Sixth, reliance or inducement must be established. But it is not necessary to show that the promises or representations relied upon were the sole cause of particular action or inaction. It is enough if they were an inducement. Moreover, a ‘commonsense and rebuttable presumption of fact’ may arise ‘from the natural tendency of a promise’.[15]
[15]Flinn at [117]. See also Gillett at 226.
72.Seventh, detriment is an essential ingredient of proprietary estoppel. But what will constitute detriment? In Gillett, Robert Walker LJ said this:
‘But the authorities also show that it is not a narrow or technical concept. The detriment need not consist of the expenditure of money or other quantifiable financial detriment, so long as it is something substantial. The requirement must be approached as part of a broad inquiry as to whether repudiation of an assurance is or is not unconscionable in all the circumstances.’
and
‘There must be sufficient causal link between the assurance relied on and the detriment asserted. The issue of detriment must be judged at the moment when the person who has given the assurance seeks to go back on it. Whether the detriment is sufficiently substantial is to be tested by whether it would be unjust or inequitable to allow the assurance to be disregarded – that is, again, the essential test of unconscionability.’[16]
[16][2001] Ch 210 at 232.
73.In Grundt Dixon J said that
‘the real detriment or harm from which the law seeks to give protection is that which would flow from the change of position if the assumption were deserted that led to it.’[17]
What his Honour said aligns with observations in the majority judgment in Giumelli[18] approving the approach of Rowland J, sitting in the Full Court of the Supreme Court of the Supreme Court of Western Australia. Rowland J had said that even if the plaintiff had not suffered an appreciable loss of income by remaining in a farming partnership over a period of years in reliance on the defendants’ representations, the detriment suffered by him was the loss of the property which he worked to improve, not to obtain immediate income but to gain the proprietary interest. For that, he gave up the opportunity of a different career path.
74.Eighth, in determining what relief should be granted (if relief is appropriate) the court must look closely at the circumstances of the particular case to see in what way the equity can be satisfied. It should approach the matter cautiously, in order to achieve the ‘minimum equity to do justice to the plaintiff’[19]. Clear it is that the court is not precluded from requiring the party stopped to make good the assumption. On the particular facts, such an order was made in Flinn and (in substance) in Gillett. But, on the particular facts, it was otherwise in Giumelli and in Rogers.
75.Ninth, in moulding an order the Court should deal with the situation, including detriment suffered, as it exists when the order is formulated...”
[17]Grundt v Great Boulder Gold Mines Ltd (1938) 59 CLR 641 at 674-675.
[18](1999) 196 CLR 101 at [27]. See also Flinn at [121].
[19]Crabb v Arun District Council [1976] Ch 179 at 198 per Scarman LJ. See also Giumelli at [42]-[47] and Flinn at [119].
Thus, in deciding whether or not the defendants’ claim of estoppel or constructive trust succeeds, it is necessary to consider what representations or promises were made or assumptions created; whether there was reliance on any representation, promise or assumption; whether there was detriment suffered as a consequence of that reliance and whether a departure from the representation, promise or assumption would be unconscionable in all the circumstances. But before turning to a consideration of these issues, I should say something about my views on the credibility and reliability of the principal witnesses.
Further, if as claimed, Mr and Mrs Berger assumed and expected that Mr Rosenberg would, during his life, give his entire wealth to Mrs Berger, then the 1988 will became quite irrelevant. I therefore reject the allegation that Mr and Mrs Berger assumed and expected that Mr Rosenberg would not revoke his 1988 will.
A similar situation exists with respect to the alleged assumption or expectation that Mr Rosenberg would not exercise his power of appointment and remove Fifteenth Eestin as trustee. It was not suggested that this was ever spoken about in the second half of 1990. Further, the conduct of Mr and Mrs Berger in involving Mr Fisher in attempts to have Mr Rosenberg resign as the appointor of the Investment Trust is not consistent with the claim that they assumed or expected that he would not exercise his power of appointment.
The allegation that Mr Rosenberg had gone back on his promise to leave all of his assets by his will to Mrs Berger really only related to the claims that Mr and Mrs Berger had been told that the Delf Brass business was Mrs Berger’s or that one day it would be. Of course, Mr Rosenberg did not own any shares in Rosekay in 1990, although his wife did. Moreover, it is instructive to note what Mr Rosenberg said, when asked in cross-examination what he meant by saying that he had given Mrs Berger the Delf Brass business. Mr Rosenberg replied that he had given Mrs Berger “control” of the Delf Brass business because “she’s a big shareholder there now”. Although not all of the shareholding in PHA is now owned directly or indirectly by the Bergers there is no doubt that they control PHA and, through it, Project Hardware.
The result is, therefore, that, in my opinion, the defendants have failed to establish the factual basis of the alleged assumption or expectation on the part of Mr and Mrs Berger and each of them, as from about 1990.
The only representation or promise which I find Mr Rosenberg made to Mr and Mrs Berger in July and October 1990 was, as previously stated, that he would ensure that his daughter would be looked after financially in the future after the parents’ deaths so that she would not be reliant on her brother Barry. Mrs Berger was, of course, at this time newly married to a man with limited assets but who was looking to invest in a business, whilst she had just become a mother and was not likely to resume employment. Having made his 1988 will and having arranged for the Dissolution Agreement, Mr Rosenberg would have thought that he had done all that he could to see that his daughter, and most importantly, his wife, were financially secure in the event that he died in the near future. He would have believed that, in that event, Mrs Rosenberg, Mrs Berger and her children (if she had more than Antony) would benefit from the assets of the Investment Trust, and that the Delf Brass business would be owned directly and indirectly by Mrs Rosenberg and Mrs Berger, in both cases free of any claim by, or entitlement of, Barry and his family to those assets.
Given that by 2004 Mr Rosenberg had survived for a further 14 years and that in that time the financial position of Mr and Mrs Berger had improved dramatically, it is hardly surprising that Mr Rosenberg concluded that he no longer needed to be concerned about his daughter’s financial situation after his death and that he could be satisfied that he had provided sufficiently for her. One only has to state that by 2004 the Bergers owned a luxury home, which Mrs Berger estimated to be worth between $7 and $10 million, plus a majority shareholding in PHA which owned the multi-million dollar Delf Brass business and that their limited liabilities were outweighed by their other assets, to see that these views would have been justified.
Moreover, it seems to me that Mr Rosenberg had become disgruntled by the failure of his daughter and son-in-law to wait for his death before attempting to obtain the full benefit of the assets which he had built up. Even on the defendants’ case, these assets were for the benefit of Mr Rosenberg and Mrs Berger during their lifetimes, and as he said rather plaintively on one occasion during cross-examination:
“I’m not dead yet, I’m here.”
Further, whilst attempting, with Mr Fisher’s assistance, to persuade him to give up his control of the Investment Trust through the power of appointment, Mr and Mrs Berger did not have the courtesy or consideration, as he saw it, to consult him about the sale of the unit in Surfers Paradise which he had purchased, or to invite him to stay at the replacement unit. In effect, Mr Rosenberg was feeling that he was suffering, in the words of Shakespeare, from something “sharper than a serpent’s tooth”[22]
[22]King Lear Act 1, scene 4.
I turn then to consider the 1994 promises. It is important to note that the allegation in the defence and counterclaim that at this time Mr Rosenberg represented to Mr and Mrs Berger, and promised them, that "Sabrina would get everything on his death" pursuant to the 1988 will and that he repeated his earlier representation and promise that the assets of the Investment Trust would be, and remain, managed and controlled by Sabrina and Ian, is not borne out by the evidence. As previously stated, what Mrs Berger said in her first affidavit was that Mr Rosenberg referred to his rearrangement of the family asset affairs in 1990 so that the assets of Investment Trust would become Mrs Berger’s after his death. I reiterate that changing the trustee does not necessarily mean that Mrs Berger will not benefit from the assets of the Investment Trust after Mr Rosenberg’s death. Certainly the rearrangement apparently referred to by Mr Rosenberg has meant, or should have meant, that Barry and his family were no longer beneficiaries of the Investment Trust. What happens about distributions in the future is a matter for another day, as obviously such decisions are dependent on the then prevailing circumstances.
Furthermore, the allegation that in 1994 Mr Rosenberg promised Mr and Mrs Berger that "Sabrina would get everything on his death" pursuant to the 1988 will, conflicts with the evidence by both Mr and Mrs Berger that at that time Mr Rosenberg referred to the fact that all of his assets had been split up between Barry and Sabrina as a reason why he needed a house to be provided for him. Nowhere in the evidence of Mr or Mrs Berger was there any reference to the alleged repetition of the management and control representation.
Therefore, nothing remains of the pleaded "1994 promises" other than the informing, namely that Mr Rosenberg told Mr and Mrs Berger that he wished to sell his apartment in South Yarra and divide the proceeds amongst his grandchildren and that he was looking to them to provide him with a place to live. Even apart from the fact that their two children would be receiving 40% of the proceeds of the sale of the apartment, it is hardly surprising that Mr and Mrs Berger would agree to do as Mr Rosenberg asked given their improved financial situation since 1990 due in large part to Mr Rosenberg’s generous treatment of his daughter. Even then, it was agreed that Mr Rosenberg would pay rent for his new accommodation.
I conclude, therefore, that the defendants’ claim that Mr Rosenberg is estopped from removing Fifteenth Eestin as the trustee of the Investment Trust, or their claim that Mr Rosenberg holds the whole of his assets and wealth on any constructive trust involving Mrs Berger, must both fail.
However, in case I am wrong about the lack of representations or promises made or assumptions created, I will briefly consider the other elements of equitable estoppel. If Mr Rosenberg did, for example, in 1990 represent or promise that he would ensure that the assets of the Investment Trust would be for the sole benefit of Mrs Berger after the death of himself and his wife, then Mr Berger’s evidence that he relied on that in spending time looking after the affairs of the Investment Trust is not unexpected. He also said, and I would accept if it had been said by Mr Rosenberg, that he relied on Mr Rosenberg’s promise about his wife receiving Delf Brass in deciding to go into that business. However, Mr Berger accepted that anything that Mr Rosenberg said to him about taking a position with Rosekay was a separate issue from how the assets of the Investment Trust might be employed.
Mrs Berger said in her third affidavit that ever since 1990 she had relied on what her father had purportedly represented and promised "in supporting and assisting Ian in the management and control of Project Hardware and the [Investment] Trust". However, in cross-examination she acknowledged that nothing that Mr Rosenberg had said to her in 1990 had been responsible for her not pursuing any particular career that she wanted to pursue or had shaped her conduct since then. She agreed that she had gone on living life in the same way.
In the defence and counterclaim the defendants gave numerous particulars of how they alleged that Mr and Mrs Berger had acted to their detriment in reliance on the alleged assumption or expectation. The plaintiffs’ counsel grouped these claims into convenient categories in their submissions and I will deal with them in a similar fashion.
The first category was the detriment relating to the Dissolution Agreement in that on 21 November 1990 Mrs Berger executed this document and subsequently performed her obligations under it. This involved her in giving up shares in her name in the companies which went to Barry. On the other hand, Mrs Berger benefited by Barry giving up any entitlements he had to the Investment Trust and Rosekay. I do not consider that this re-arrangement of interests was shown to be detrimental to her. Moreover, Mrs Berger agreed that the Dissolution Agreement put into effect the things that she and her father had discussed and that whatever arrangements he had made would be in her interests.
The second category was the detriment relating to Fifteenth Eestin and the Investment Trust in that Mr and Mrs Berger had since November 1990 managed and controlled the Investment Trust and its assets and day to day affairs without remuneration; that they had expended time, skill and effort in improving the value of each of the corner properties by renovating existing buildings or demolishing them and constructing new buildings thereon and procuring tenants for each of the properties; and that Mr Berger had provided guarantees for bank loans made to Fifteenth Eestin, including the $3 million facility from Macquarie Bank which at the time of the hearing secured a debt of approximately $1 million.
I have already referred to the conflict in the evidence about just how much time and effort was spent by Mr and Mrs Berger in looking after the affairs of the Investment Trust. All of that work has been for the benefit of the beneficiaries generally, and Mrs Berger in particular, given the direct and indirect benefits she has received by way of income (and capital) distributions to her or companies in which she has an interest and by way of loans. Moreover, both Mr and Mrs Berger said that they chose not to be remunerated by Fifteenth Eestin for their work done for it. It was not said by either of them that this decision was influenced by any representation or promise by Mr Rosenberg. In any event, the saving by Fifteenth Eestin in not paying any remuneration to Mr and Mrs Berger meant that there was more to be distributed to them or their companies, so that the suggestion of detriment is not correct. Finally, it is difficult to see how the giving of the guarantee by Mr Berger to Macquarie Bank, which was the only guarantee by him referred to in the evidence, could constitute a relevant detriment when he was a party to the loan facility in his own right and therefore liable to the bank regardless of his guarantee.
If I had found that Mr and Mrs Berger had suffered a detriment in not being remunerated for the work on behalf of Fifteenth Eestin and that it was therefore unconscionable for Mr Rosenberg to remove it as trustee of the Investment Trust, in my opinion the appropriate remedy would not be to deny Mr Rosenberg the right to exercise his power of appointment, but to order that there be appropriate compensation for Mr and Mrs Berger in respect of their work.
The next category is the detriment relating to Project Hardware in that Mr Berger gave up the opportunity to seek a different career or invest in other business ventures when he agreed to take over the running of the Delf Brass business, and that he lent his own funds to Project Hardware and provided guarantees for bank loans made to it. A further detriment in this category was the fact that Mr and Mrs Berger had caused Project Hardware to make further loans to Fifteenth Eestin in a net sum of $3,265,873.53 since I July 1991, which meant that as at 30 June 2004 Fifteenth Eestin was indebted to Project Hardware in the total sum of $4,434,191.01.
Whilst it is true that Mr Berger did give up the possibility of another career or business venture, the reality is that taking over the Delf Brass business was the perfect opportunity for him. He was looking to buy a business and he had already rejected a number of other options. Given the present financial strength of the Delf Brass business, due no doubt to the skill and hard work of Mr Berger in developing the existing business, it is difficult to see how it could be said that Mr Berger has suffered a detriment by agreeing to take over the running of that business. Both Mr and Mrs Berger have received a salary from Project Hardware and substantial superannuation payments have been made for them.
Mr Berger’s loans have been repaid. It was his decision whether or not to charge Project Hardware interest. Again, if this had been found to be a relevant detriment, then compensation for the lost interest would be an equitable outcome. There was no evidence that any guarantees given by Mr Berger in respect of loans to Project Hardware had been called on.
The outstanding loans by Project Hardware to Fifteenth Eestin is not a detriment suffered by Mr and Mrs Berger. The fact that they were made interest free was Mr Berger’s decision. The benefit to the Investment Trust has been reflected in the distributions made by it, the most significant of which was the capital distribution of more than $2 million to Mr and Mrs Berger jointly.
The final category of detriment is that relating to the provision of a place for Mr Rosenberg to live. As previously stated, Mr Rosenberg has always paid rent for the various homes in which he has lived. Moreover, if anyone is suffering detriment from this arrangement, it is Mistirose, the owner of the various properties provided for Mr Rosenberg from time to time, and not Mr or Mrs Berger.
It can be seen, therefore, that even if I had found that other representations or promises were made by Mr Rosenberg with the result that he created an assumption or expectation on the part of Mr and Mrs Berger, I consider that the strongest examples of detriment allegedly suffered by them in reliance on his statements could be fairly cured by the payment of equitable compensation rather than preventing him from exercising his power of appointment under the Investment Trust or from changing his 1988 will.
Removal of the Trustee for Breaches of Trust
In the light of my above conclusion it is not strictly necessary to consider this alternative claim by the plaintiffs. Nevertheless, it is appropriate that I deal briefly with the arguments about each of the breaches relied on by the plaintiffs.
Again, there was really no dispute between the parties about the relevant legal principles. In Miller v Cameron, Dixon J, as his Honour then was, stated:
"The jurisdiction to remove a trustee is exercised with a view to the interests of the beneficiaries, to the security of the trust property and to an efficient and satisfactory execution of the trusts and a faithful and sound exercise of the powers conferred upon the trustee. In deciding to remove a trustee the Court forms a judgment based upon considerations, possibly large in number and varied in character, which combine to show that the welfare of the beneficiaries is opposed to his continued occupation of the office." [23]
[23](1936) 54 CLR 572 at 580.
The plaintiffs argued that there were numerous income distributions made to non-beneficiaries of the Investment Trust, in particular Project Hardware and S & I Investments. It could hardly be disputed that distributions to non-beneficiaries would be contrary to the interests or welfare of the beneficiaries of the trust and would not be "a faithful and sound exercise of the powers conferred upon the trustee". The question is, however, whether the plaintiffs were correct in asserting that Project Hardware and S & I Investments were not beneficiaries of the Investment Trust.
The purported assignment from Lionel Rosenberg to Rosekay was clearly ineffective for two reasons. First, because a beneficiary of a discretionary trust cannot assign his "position" as a beneficiary, and secondly, because Lionel was never a beneficiary of the Investment Trust.
The second way in which Rosekay was sought to be made a beneficiary was by the series of documents drafted by Mr May, and which Mr Berger backdated. Of the six Investment Trust documents, executed copies of only two of them were produced – the Lionel Rosenberg assignment and the Deed removing Barry and his family as beneficiaries. They were both signed by Mr Rosenberg and Mrs Berger under her maiden name. Mr Berger said that all three sets of documents were executed in about May 1993. I am satisfied that the remaining documents in the Investment Trust set would have been signed by Mr Rosenberg and Mrs Berger. They were the appropriate people to sign as at the backdated date; they signed the Family Trust set of documents and Mr Rosenberg did not deny doing so.
Counsel for the plaintiffs submitted that, in any event, the purported amendments to the Investment Trust Deed would have been ineffective because they contravened the intention that underpinned the settlement. To remove the limitation on the power of amendment prohibiting the addition of beneficiaries "not related to the specified beneficiaries by blood or marriage" and to add a new class of beneficiary of any company nominated by the trustee was, it was submitted, to attempt to achieve the very result sought to be precluded by the express words of the Trust Deed. It was submitted that no doubt this was why Mr Harris had advised that Rosekay could not be added as a beneficiary. Nevertheless, the amending documents had been prepared by Mr May of Herbert, Geer & Rundle and Mr Berger was entitled, in my opinion, to act on the basis that they were legally effective.
Therefore, I do not consider that the making of income distributions to Project Hardware was a breach of trust. Even if the amendments were ineffective and thus the distributions were made in breach of trust, I do not consider that, in the circumstances, such conduct would warrant the removal of Fifteenth Eestin as trustee at the suit of Mr Rosenberg. In my opinion, Mr Rosenberg would have been well aware in 1993 of what was happening with respect to the distributions to Rosekay. After all, in 1989 when Mr Rosenberg was clearly in charge, the directors of Fifteenth Eestin had resolved to make an income distribution to Rosekay, no doubt on the advice of the accountant then acting for Mr Rosenberg and Fifteenth Eestin. Mr Rosenberg signed the relevant documents in 1993 when he was still active, on his account, in the affairs of the Investment Trust. Finally, Mr Rosenberg agreed that he had no objection to distributions being made by the Investment Trust to Rosekay/Project Hardware. It seems to me, therefore, that Mr Rosenberg would have willingly participated in the arrangements to make Rosekay a beneficiary of the Investment Trust.
If the May 1993 amendments to the Investment Trust Deed were effective, then no question arises as to the legality of the income distributions to S & I Investments. Moreover, I find that Mr Rosenberg knowingly participated in the first distribution to S & I Investments by signing the document nominating that company as a beneficiary in June 1993 and by signing the 1993 tax return of Fifteenth Eestin which clearly revealed the $165,952 distribution to S & I Investments. Thus, even if the amendments were not effective and the distributions were in breach of trust, such conduct by the directors of Fifteenth Eestin would not warrant its removal as trustee, for the same reasons discussed above in respect of Project Hardware.
The third non-beneficiary to whom an income distribution was made was Mr Berger, on the one occasion in 1998. Whatever one might think of the competence of those that allowed such an error to occur, the fact is that it happened only once, it involved only $3,000 and once the error was highlighted by the plaintiffs Mr Berger quickly agreed that the sum in question would be repaid. This breach of trust would not therefore warrant the removal of Fifteenth Eestin as trustee, in my opinion.
The capital distribution in the same year to Mr and Mrs Berger jointly obviously involved a considerably larger sum, over $2 million more. Whilst Mr Berger’s fruitless attempts to cover up this breach of trust by maintaining that it was made to Mrs Berger alone have damaged his credibility in my eyes, I do not otherwise view it as being that serious, certainly not one which would warrant the removal of Fifteenth Eestin as trustee. If Mr Same, and therefore Mr Berger, had not been acting under the misapprehension that Mr Berger was a beneficiary of the Investment Trust, I am sure that steps could have been taken to achieve the same result, namely putting over $2 million into the hands of the Bergers in a tax effective way, without involving Fifteenth Eestin in a breach of trust.
The final breach of trust relied on by the plaintiffs was the trustee's alleged failure to give real and genuine consideration to the exercise of its discretion, by leaving the decision-making, particularly in relation to the making of distributions, to its accountant Mr Norman Same, including the habitual use of trust funds to advance the personal interests of Mr and Mrs Berger, or for the purposes of "the Berger Group", without considering whether to do so was in the interests of the Investment Trust or the beneficiaries as a whole.
The exercise by the trustee of a broad and unfettered discretion will not be examined or reviewed by the Court if the discretion is exercised by the trustee in good faith, upon real and genuine consideration, and in accordance with the purposes for which the discretion is conferred and not for some ulterior purpose.[24] It is, however, open to the Court to examine the evidence to decide whether there has been a failure by the trustee to exercise the discretion in good faith, upon genuine consideration and in accordance with the appropriate purpose.
[24]Karger v Paul [1984] VR 161.
In this case, both Mr Berger and Mr Same conceded that since about 1992 the decisions about the distributions had been governed by tax minimisation considerations. Clearly, no thought was given to the individual needs of a beneficiary such as Mr Rosenberg. As far as Mrs Berger was concerned she never addressed these issues in her own mind. She simply went along with whatever Mr Same, via her husband, told her was to happen.
The situation is further aggravated, in my opinion, because the evidence discloses that the directors of Fifteenth Eestin have been acting under the misapprehension that all of the Investment Trust assets belonged to Mrs Berger. In those circumstances, Fifteenth Eestin has not been exercising, and presumably will not exercise, its discretion as trustee in the interests of all of the beneficiaries of the Investment Trust. If necessary, I would, therefore, have been prepared to order the removal of Fifteenth Eestin as the trustee of the Investment Trust.
The Relationship between Mr Rosenberg and Glen Oak
The power of the appointor to remove the trustee from office and/or to appoint a replacement trustee or an additional trustee contained in cl. 10A of the Deed of Settlement of the Investment Trust was subject to the following proviso:
"(a)that no beneficiary shall be a trustee;
(b)that the said appointor shall not appoint himself or herself or any legal entity in which he or she has a financial or controlling interest in [sic] or a company which he or she is a director of or in which he or she owns or holds any part of the issued capital of, as a trustee;
(c)...
(d)No removal or appointment under this clause shall be effective in the event that the appointor or the successor imposes or attaches any conditions whatsoever upon the Trustee purportedly appointed or to be appointed that relate to the manner in which the Trustee is to exercise any of the discretions conferred upon him hereunder.
(e)..."
Counsel for the defendants submitted that Mr Rosenberg had a controlling interest in Glen Oak, even though, at the time of its appointment as trustee on 15 July 2004, the sole director and shareholder was Mr John Adams, a member of the accounting firm of Horwaths. Mr Adams was a registered company liquidator and bankruptcy trustee and an accountant with experience in administering trusts. He denied that Mr Rosenberg had a financial or controlling interest in Glen Oak, which was incorporated on 14 July 2004.
The basis of the defendants’ submission was that Mr Rosenberg had consulted with Mr Adams and was sufficiently well acquainted with him to be familiar with his signature, that Mr Rosenberg’s solicitors had met with Mr Adams, and that Mr Barry Rosenberg had met with Mr Adams on 15 July 2004, had told him that his appointment was to be "on behalf of" Mr Rosenberg and had given him an indemnity for payment of his fees.
I agree with the submission by counsel for the plaintiffs that for Barry to say to Mr Adams that the appointment was to be "on behalf of" Mr Rosenberg meant no more than that he was identifying the person who held the power of appointment. Moreover, such an expression is not the same as saying that Mr Adams was to act on behalf of Mr Rosenberg in making the decisions of the trustee. That would be contrary to cl.10A(d) of the Trust Deed.
Any possible concern about Mr Adams’ independence was put to rest as far as I was concerned by his answers to some questions by me. Asked how he would go about the task of a trustee of deciding what distributions to make, Mr Adams replied:
"Very generally in equity if I can, it’s certainly – when you’ve been appointed to a discretionary trust as a trustee, you don’t use too much discretion as on an equitable basis unless you’re directed to do so otherwise by the court or by some other order. But most instances I’ve been involved with is unit trusts, and unit trusts are just in accordance with units held, it’s a bit different.
So just to make sure I’ve understood you completely, if for example there were five beneficiaries and it’s a discretionary trust, your starting point at least would be to look at what could be distributed and divide it into five?---Correct.
And could that be altered by individual circumstances?---Could be, yes."
He then went on to say that he would just have to apply whatever principles he decided at the time but that he would try and get consensus between everybody if it had to be that way. He said that he was known to try and get consensus to his detriment sometimes but that was how he operated, and if it came to "push and shove" he could make a decision.
Mr Adams is an independent professional person who, I am sure, would approach the exercise of discretion by the trustee in an appropriate manner. I reject the submission that the matters referred to by the defendants meant that Glen Oak or Mr Adams was controlled by, or subject to, direction from Mr Rosenberg.
Orders
The question of the appropriate orders and declarations can be deferred until the parties have had an opportunity to read and consider my reasons for judgment. As previously stated, one outstanding issue is whether the vesting of trust property in Glen Oak is subject to an equitable charge or lien by Fifteenth Eestin over the property of the Investment Trust to secure its right to be indemnified in respect of the liabilities of the Investment Trust.
Both before and during the hearing of the proceeding, every encouragement was given to the parties to attempt to resolve their differences. That did not prove possible. I regret to say that it seems to me that unless the parties can reach an accommodation on the way forward there is a risk that disputation will continue. For the sake of all of the members of these families, I trust that some agreement can now be reached.
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